Reaching the End of an Era in Check Processing

On December 11, 2009, the Philadelphia Fed successfully completed its role in the multi-year restructuring of paper check-processing operations within the Federal Reserve System. As of that date, all paper check-processing operations here migrated to the Cleveland Fed, ending nearly a century of processing paper checks in Philadelphia.

In 2003, the Federal Reserve Banks announced plans to significantly reduce the System's 45 locations for processing checks, as consumers, businesses, and banks grew less dependent on cancelled paper checks. The Check Clearing for the 21st Century Act of 2003, popularly known as Check 21, promoted the greater use of electronic processing of check images rather than the return of an actual check. This legislation, plus greater use of electronic payments, led to a major reduction in the number of paper checks processed throughout the industry. Today's consumers are more apt to pay by debit or credit card for their "in person purchases" and are increasingly relying on Internet purchases and online banking and bill paying.

In November 2008, the Federal Reserve accelerated the restructuring of its national check processing and announced it would consolidate to a single location for paper check processing in Cleveland and a single location for electronic check processing in Atlanta. On February 26, 2010, the Atlanta Fed moved its paper check-processing operations to Cleveland to complete the restructuring.

For the past few years, Philadelphia had been one of four main consolidation sites during the check-restructuring project. In 2006, the Bank completed the first transition by assuming the check-processing operations of the New York Fed's main office. During 2008, Philadelphia assumed check-processing operations from the New York Fed's Utica, N.Y. office and the Boston Fed's location in Windsor Locks, Conn. Finally, Philadelphia consolidated the check-processing function of the Richmond Fed's Baltimore branch in April 2009, before it began planning to transfer operations to Cleveland.

Over the past decade, the Philadelphia Fed's check-processing operations made major changes in workflow to handle an increasing number of electronic checks, including the addition of high-speed printers for printing substitute checks. Philadelphia retains a small team to convert electronic check images to print for depository institutions in its territory that have not yet converted their operations to receive check images electronically.

Through most of its check-processing history, the Philadelphia Fed was the largest and most innovative check-processing office. Philadelphia made major contributions to advance automated check-processing software developments and offer value-added services to its customers. Check operations peaked in 1999 with an average daily check-processing volume exceeding 4.5 million checks, representing more than $7 billion in value. At the time, the Federal Reserve System cleared about a third of more than 42 billion checks written annually.

"We salute the hundreds of Federal Reserve Bank of Philadelphia employees and officers who contributed to an efficient check-processing operation through the years, and we especially thank the staff who served with distinction through this challenging period of restructuring," said Arun Jain, senior vice president, who oversaw the department's work.

The successful completion of check restructuring is the latest milestone on a journey to provide the nation with an efficient payment system, as shown on the accompanying timeline of nearly a century of check processing in Philadelphia.

Check Processing in Philadelphia

1910s

In 1917, the Bank reports a daily average of 37,500 checks, totaling $23.7 million. Checks are sorted by hand on tabletops.

1920s

By 1922, the Bank processes an average of 200,000 checks a day. In 1928, a County Clearinghouse Plan features one-day check clearing to help eliminate check-kiting in the areas outside the city clearinghouse zone.

1940s

The Bank introduces the IBM 803, a mechanical sorting machine about the size of an industrial washing machine and almost as noisy. In 1944, the Bank processes more than 186 million checks, with about a quarter of the volume directly connected to the war effort.

1950s

The industry develops a magnetic ink character recognition (MICR) system for encoding check data, so data could be read electronically.

1960s

In 1961, the Bank installs the first computer-controlled check processing system, CHIPS (Check Handling Information Processing System). By 1964, the Bank is processing 1 million checks a day.

1970s

In 1974, the Bank implements a regionalization plan to provide improved services to distant Pennsylvania banks, with other banks handled by the City-Delaware-New Jersey region. By 1975, the Bank is processing approximately 2.5 million checks a day.

1980s

In 1980, the Monetary Control Act requires the Fed to charge depository institutions for financial services, including check processing, which prompts the drive for greater efficiencies. In 1984, the Bank installs five high-speed IBM 3890 MICR readers/sorters, which are capable of sorting 2,000 checks a minute. Meanwhile, businesses expand the use of automated clearinghouse (ACH) electronic payments.

1990s

In 1993, nearly 90 percent of the nation's payment transactions still involve checks, but ACH and payment cards are growing quickly. By the mid-1990s, the Bank is leading the Federal Reserve System's efforts to standardize check-processing equipment and software platforms. It also converts from a District-unique application to the centralized FedACH system for electronic payments.

2000s

In 2001, the Bank clears 1.4 billion checks out of a total of about 42 billion written that year. In 2006, Philadelphia assumes the role of a key consolidation site for check-processing operations. On December 11, 2009, the Philadelphia Fed sorts its last check as operations move to the Cleveland Fed.